A problem with providing loan relief or a bail-out of banks is there is no clear point where you can stop the number of bail-outs. The Fed starts taking a wider range of collateral and again there is no clear rules of what will be allowed and what will be stopped. Do you bail-out auto companies? Do you take in sub-prime collateral? It is only natural that municipalities will come asking for some debt relief.
California is potentially asking for guarantees or loan relief for $7 billion in funds. Massachusetts is also going to the government to ask for help. Clearly, the municipal debt market is in disarray. It may be worse than the the corporate markets given the fragmented nature of state borrowing and the fact that so much of the market has used insurance to gain the highest ratings.
Should the government provide support for the municipal market? Hard to say in any particular case given there is the potential for contagion if nothing is done, but it is clear that if the relief is extended to the states then our form of federal government with national, state, and local government will be significantly changed.
Taxpayers at one end of the country will be providing support for the spending in another state at the other end of the country. If the Federal government provides relief should they have the ability to control spending or taxes within a state? Clearly, in the case of bank bail-outs there is the assumption of control of assets and management. Should the same power be given to the Federal government if it is needed to avert bankruptcy of the state? This is similar to the 1980's problem in Latin America where there was the classic refrain by the head of Citibank that governments do not go bankrupt. So thereafter many countries did just that.
If the government provides this kind of relief than what happens to the credit rating of the United States? Are there no limits or are the limits dictated by the player or situation?
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